Chapter 4   Investments

Learning Content Chapter 4

Investment selection methods:

1  RT                 The method of the Return Time; or the payback time method

2  ROI               Return On Investment;

3  NPV / IRR     Net Present Value / Internal Rate of Return.

The Learning Goals and Learning Content are indicated at the beginning of each Chapter from ‘Business Economics VI Groundbreaking’.

We buy something and for that we spend money, then we are investing. And we do so because we expect that these expenditures in the present will lead to additional revenue in the future, such that ultimately, if all the pluses and minuses have been settled, something will remain. We make this investment because we expect it to be profitable. It is an expectation. Nobody can know for sure. Because the future is simply unknown.

Strictly formal, an investment is a series of expenditures and receipts spread over time.

Expenditure must be weighed against receipts in some way. How big are these expenses and how large are those receipts and when do they take place? What are the cash flows (literally the flows of money)? The FINANCING ISSUE is separate from the INVESTMENT ISSUE. The investment issue is about good versus bad investments. We ultimately have to keep the best investment projects, that is, those projects that we want to continue with. Only then does the financing issue start c.q. we face the question ‘how to finance?’ After an investment it does not stop, it actually starts. Depreciation will follow and finally – if things are going well – profit will remain. Investments, depreciation and profit measurement form a trinity. The NPV / IRR method does not take into account any necessary backlog depreciation; the investment is only settled on the basis of the historical cost price. The method can select in the negative sense but usually not positive. Do NOT do it, i.e. declare a project UNacceptable, that is possible with NPV / IRR as has been argued. But to prioritize two or more acceptable projects is usually not possible with NPV / IRR.

Do you want to know more? See Chapter 4 in ‘Business Economics VI Groundbreaking’.

 

This book harshly criticizes out-of-date Business Economics textbooks.

 

You are very poorly trained in Business Economics even at Business Schools that ignore this book.

A self-study book, hardly needing a teacher. Necessary also for many managers in companies to improve their own performance.

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